This Q&An initially appeared in PitchBooks Q2 2021 US PE Breakdown..
Sean Adkins provides value for private equity clients across a large range of investment by working at the intersection of innovation and operations. He thinks in challenging typical thinking patterns with brand-new ideas that are grounded in data-driven choice making..
Brian Jacobsen leads the firms co-investment arm, West Monroe Capital, which aligns our interests with private equity clients by buying choose services where West Monroe will have the ability to drive worth post-investment. He is a former partner of a number of private equity firms and a veteran West Monroe customer.
What are the most underrated origins of alpha/value production for PE fund managers in the current environment?.
Sean: Everyone talks about using information, but it is generally in the context of operations and running the service much better. I would challenge financiers to consider this question: If you werent able to make another acquisition, how could you utilize information to optimize revenue? Brian: Another is the discipline with which financiers integrate services when carrying out on an acquisition- led growth technique. Sean: Back to the topic of data, another important practice is to go into the process armed with information- modeling abilities, whether your own or a partners tools, that you can release quickly. The most significant challenge I see is the buy-in of senior individuals and leaders when a PE company is leading the charge on add-on acquisitions.
Brian: I settle on individuals. When a PE company is leading the charge on add-on acquisitions, the biggest obstacle I see is the buy-in of senior individuals and leaders. Say a CEO or a couple of division heads do not totally think in doing what it requires to put the organizations together. If you dont have leadership assistance around the “why,” then the “how” becomes far more hard..
What are PE fund managers not speaking about that they should be thinking about?.
Sean: We cant really say companies are not speaking about innovation, since they have been for years. The problem is that, oftentimes, theyre just discussing it– many still do not have a technology technique across the portfolio..
Brian: Another is the discipline with which financiers combine services when performing on an acquisition- led development method. Investors follow respect to the intent to integrate companies to achieve that goal. However there is still a great deal of disparity in execution and, remarkably, a great deal of worth left uncaptured from these add-on acquisitions.
How do those motorists differ across sectors, and which ones are best primed in the existing environment, given more comprehensive macroeconomic and market elements?.
Sean: I believe the biggest variance depends not so much on the sector however on the underlying intricacy of the organization. Companies– generally in the customer items, manufacturing, and retail sectors– that have great deals of consumers and/or stock keeping units or offering types are most likely under-optimized with regard to earnings development capacity. Hence, they have the greatest untapped opportunity to benefit from data..
Sean: Back to the topic of information, another essential practice is to enter into the procedure equipped with information- modeling capabilities, whether your own or a partners tools, that you can deploy quickly. What if you had the ability to ingest transaction information quickly and forecast future need or the strength and capacity of particular consumer segments? That ability is out there. Brian: A third great practice is just extensive preparation and doing your work ahead of time– understanding the market and gamers before diving into a process that you know is going to move quickly. In other words, know the pond in which you are fishing so you are not navigating in the dark. Have your market diligence done and your thesis on the sector complete, or at least well-advanced.
Brian: In scenarios where the investors and executives are completely on-board with combination and spend the time and cash to ensure business are really integrated, fantastic results can take place. It can be actually powerful.
Brian: One location that I see as especially well-primed to use data to grow earnings is around the convergence of retail and healthcare. Technology and information are video game changers.
Because you have to define the go-forward team and platform, mergers of equates to tends to be the most challenging. Thats where you are more than likely to face the challenges of buy-in and culture.
How do those obstacles vary throughout target business size, as well as by type of transaction– for instance, add-ons versus carveouts?.
Sean: The difficulties of people, culture, and procedures are the same, regardless of size. Size, though, might determine the resources available to focus on integration. It is difficult to run the organization and focus on the combination.
Offered the total levels of competition, what are the very best practices for balancing in between speed in closing and due diligence? How do concerns stack up today?.
Brian: The speed at which todays market is moving requires financiers to set priorities for the diligence process and identify what makes a go/no-go decision, or when something might trigger them to wish to pay a materially different cost. Of course, you desire to prevent the catastrophic threats: “I will not purchase if these particular things dont take a look at.” However listed below that is a second tier of threats, the potential impact of which can be approximated, ring- fenced, and dealt with post-closing..
Sean: Everyone discuss using data, but it is typically in the context of operations and running the organization better. I believe lots of fund managers are missing a chance to use their information to enhance revenue from an existing platform by determining cross-selling and upselling chances. Add-on acquisitions have become an increasingly typical value-creation technique. However I would challenge financiers to consider this question: If you werent able to make another acquisition, how could you utilize information to optimize revenue? The information exists, as are the abilities for examining it..
Sean: The investors who are most successful stay within their location( s) of knowledge. Discovering brand-new ways to assess revenue optimization and improve performance throughout the hold duration is important, not simply for PE firms but for the partners that provide them with services.
What are the greatest obstacles in post-merger combination for PE purchasers today?.
Sean: Systems and people. It sounds basic, but it typically comes down to that. Especially in circumstances where you are integrating several companies, not just two, you need to get them all on a single sheet of music. That is affordable or not easy. In some cases, we see investors pick to delay integration since of the intricacy. If you have 20-year-old systems, you will require to fix that, however in some cases the combination work is left as advantage for the next owner..
Every PE company needs to understand innovation and how to apply it to enhance financial investments. Financiers have actually had the ability to get away with not having an innovation strategy and proficiency, however five years from now, that will not hold true..
Sean: Systems needs to be downstream from that. Some integration efforts start with implementing a common enterprise resource planning system but struggle due to the fact that the assistance at the top isnt there..
Financiers will need to think more seriously about how they can make business much better in a method that another purchaser can not. You require to have a viewpoint about why you are the finest owner for another firm versus this organization..
Brian: We do see some differences when it comes to kinds of transactions. Carveouts normally dont have competing priorities. In that sense, they are fairly straightforward, offered you are working with consultants who have actually done it prior to and comprehend where the mistakes lie and how to get around them..
Brian: From a market point of view, it appears like todays high volume will continue a minimum of for the next couple of quarters, however we do not know what comes after that, especially given the rumblings about tax law changes..
Similarly, small tuck-ins have to do with including on to an established platform. The obstacles there are generally lack of resources or of a playbook for how to onboard and integrate a smaller acquisition. If you are attempting numerous add-ons, then the complexity goes up, and it ends up being critical to have a well-conceived process in location for moving them onto the go-forward platform..